Positive Linking: How Networks Can Revolutionise the World

Reviewed by
Károly Takács[1] MTA TK "Lendület" Research Center for Educational and Network Studies (RECENS) and Corvinus University of Budapest, Institute of Sociology and Social Policy

“In the early twenty-first century, just as it did in the late nineteenth, economics in general makes the assumption that individuals operate autonomously, isolated from the direct influences of others. A person has a fixed set of tastes and preferences. When choosing amongst a set of alternatives, he or she compares the attributes of these alternatives and selects the one which most closely corresponds to his or her preferences”. (p.1)

We are social species, our actions are interdependent with actions of our friends and other relevant others, and we are very much influenced in our decisions and preferences by our friends and other relevant others. These basic facts, however, are new to most economists. Economics as a discipline discovered networks just recently, but this discovery can radically change the old-fashioned theory (because economics is still largely considered as one unitary theory) that is built on the absurd idea of an isolated representative agent.

This is the provocative standpoint of Positive Linking. The book is especially challenging for hardliner general equilibrium theorists and DSGE macroeconomists. They would be frustrated by the conclusions of this book. For other economists, who believe in scientific progress, the perspective offered by the book on the role of networks in economics might bring enlightenment. Furthermore, for the general reader, the book is a pleasant intellectual journey that is not lacking British sarcasm and rightly positioned questions and criticism on the fundaments of a derailed discipline.

By today, fortunately more and more economists give up their false belief in individualism in its strict sense. The first thing economists gave up is that individual choices have individual consequences: they started to deal with externalities. Less in the mainstream, following the work of Thomas Schelling, economics started to study individual choices with unintended consequences more and more widely. Despite the external and unforeseen consequences (and calculation difficulties beyond reason), economics gives up the non-matching faith in individual optimization at a much slower pace.

Herbert Simon, who is the positive hero in this book, has alone characterized individual decision making more precisely and accurately than the entire neoclassical paradigm. He highlighted that individual decisions are governed by bounded rationality, rules of thumb and satisficing principles. These helped him receiving a Nobel Prize, but did not change how most economists think about individuals and markets.

The idol of most economists, homo oeconomicus, however, lives a tough life nowadays. The financial crisis buried a dagger in his breast. Ormerod’s book provides colourful examples how the financial crisis is related to the doom of economic theory. He builds up sufficient evidence so that one can call the stubborn rigidity of the standard theory responsible for what has happened. So what is next? As Keynes reformed economics thanks to the great recession, will economics be reformed now thanks to the recent financial crisis? According to the foresight of the book this is exactly what is going to happen and networks will play the role of revolutionaries.

Historically, it is surprising that homo oeconomicus lived so far on falsified grounds and economics consequently on non-scientific principles. According to this model of man, like in a box, every person maximizes his or her fixed utility given the actual constraints at the time of the decision. Nobody else matters.
Homo oeconomicus is perfectly rational, which typically includes that he is selfish or individualistic. Let us consider the situation in which there is no place for individual benefits, direct or indirect reciprocity, or any other rational considerations. This should be an experimental situation that excludes all possible disturbing factors. The best candidate is the situation that is described as the dictator game (DG) by economists. An individual has to divide 100 dollars she received as an endowment (as a gift from the researcher), between herself and an unknown individual, whose identity will never be revealed and for whom her identity will never be revealed either. In the DG, every rational individual will keep the full amount of 100 dollars in her pocket.

This is not at all what we observe in DG experiments. So we can conclude that the hypothesis about perfectly rational (or perfectly individualistic) character of humans is rejected. And this should be the full stop for all scientific models that are based on perfect rationality.

Fortunately, most economists today realize the relevance of social preferences, so at least homo oeconomicus is down the slope to remain the relic of the past standing next to alchemy and extended studies of the Sun circulating the plain Earth. Although economists still do not talk about socially adopted or adjusted preferences, it will also come.

Ormerod suggests that the key of successful human adaptations is not rationality, but copying and imitation. According to evolutionary biologists, social imitation is indeed a relatively successful and simple strategy for survival. Copying and imitating friends and relevant others: this is the direction that brings networks to the core of studying economic behaviour.

Yet another fundamental problem with mainstream economics according to Ormerod is the non-justified use of advanced mathematics. Grad students of economics learn pure math in order to create sophisticated models on unrealistic grounds. All their efforts and brilliant minds are wasted. In mainstream economics, advanced mathematics has been called by a myriad of Noble prize winners, economics faculties, and graduate schools to move “forward” in the imagined box of the representative agent. It is still the characteristic of the discipline and given that new generations are socialized into this it will remain so for a while.

Modelling and mathematics, however, is not the problem per se. The major point is that models should not be purely judged by their predictions, just as many economists claim. Model assumptions should also be subject to criticism. If assumptions are not supported by any empirical observation or, even worse, empirical observations clearly show something different, then the models that are built on falsified assumptions do not lead to scientific development.

For the partial defence of economics, on the other hand, many disciplines from socio-physics or the study of complex systems in physics, when looking at the human society, fully neglect the relevance of agent autonomy and intentionality of action. As a matter of fact, most decisions made by humans are intentional. Alternatives might make things worse, because humans will face an extra problem of making the decision, but never drive intentionality away. Our decisions are intentional, and we know it, because we decide day by day as we wanted. Even more, our decisions are affected by incentives, just as one of the basic tenets of economics proposes. But this does not mean that they are determined by incentives. This is another key message of Ormerod: “Up to a point, Lord Copper!”.

Incentives drive our behaviour, but this does not necessarily mean that we are aware of it, and not at all that we would maximize our utility functions in a planned way. Major science journals published papers that realized this, unlike journals in economics. Ormerod cites (p. 93) Custers and Aarts ( 2010): “As humans, we generally have the feeling that we decide what we want and what we do [...]. We only have to decide to do so, and we can go and see a movie tonight or hang out with friends in a bar. It is up to us. Our behaviours seem to originate in our conscious decisions to pursue desired outcomes, or goals”. This paper goes on as “scientific research suggests otherwise” and concludes “the basic processes necessary for goal pursuit - preparing and directing instrumental actions and assessing the reward value of the goal - can operate outside conscious awareness”.

Providing these guidelines, the book still does not replace economic theory with a new one. We often hear from economists as a defence of the standard theory that the theory should not be replaced, because there is no better comprehensive theory. But yet again, nothing saves a comprehensive theory if it is wrong. Alternatives have clearly better justifications and as the financial crisis showed also no worse predictions. The book highlights how networks could the basis of economics 2.0 and provides plenty of hints how agent based modellers could contribute to this revolution by setting up economic models that are based on empirically solid assumptions. In short, here there is also a challenge for social simulation to contribute to improve economics and reconcile it with behavioural and social sciences.

Notes

1 I would like to thank Nikita Krugljakov and Flaminio Squazzoni for comments on a draft version of the review.